Is Fitbit the Next GoPro?

The last two quarters have been frustrating for Fitbit (FIT) longs as the stock has crashed despite reporting good earnings. The company reported its Q1 earlier this month and its shares plunged due to weak Q2 guidance.

Although Fitbit’s 2016 guidance was strong, Mr. Market was not pleased and it seems like retail investors have learned their lessons from GoPro (GPRO). I have been saying that Fitbit is the next GoPro for a long period of time. Fitbit has fallen over 50% since I first recommended shorting the stock, and although its decline has not matched the downfall of GoPro, I think there are many similarities between both the companies.

Hence, I think despite the post-earnings drop, Fitbit is still a risky investment due to its moat-less business model.

Like Fitbit, GoPro also had a period of surging sales, increasing price targets and widespread optimism. However, as it was later proven, GoPro’s moat-less business model fell prey to the competition as the company couldn’t protect its hype.

As far as patents go, GoPro couldn’t do too much to protect its action camera technology from the competitors. The company did patent the designs of its cameras and a few other things, but that couldn’t prevent other companies from entering the market and eating its lunch. As a result, GoPro’s sales soon turned south and the company started reporting a massive drop in sales this year.

Like GoPro, Fitbit also has a moat-less business model that can’t be protected by patents. Although Fitbit can patent the designs of its watches, it can’t do anything to prevent from other companies to enter the wearables market and challenge its dominance. Although Fitbit is currently enjoying strong sales growth trend, I think the growing competition will take its toll on Fitbit soon.

While the 50%+ year over year sales growth is impressive, Fitbit longs should be cautious as, like GoPro, Fitbit’s sales could turn south very soon. The undervaluation of Fitbit may seem tempting, but that didn’t stop GoPro from continue dropping. In fact, GoPro has been one of my most successful short calls, falling over 60% since my initial recommendation.

Given the similarities between both the companies, I think it is very likely that Fitbit will end up like GoPro. Investors with an appetite for risk can consider buying put options or shorting the stock despite its recent plunge as I think Fitbit still has a lot of room to fall. However, investors who have reaped over 50% profit since I recommended shorting the stock should consider closing their positions now.